But what the average person looks at isn't the over all price but the payment price and this changes as rates change.
I tried to show you that in the initial phases of interest rate increases which rise due to inflation, there is little or no impact on home buyer psychology. In fact, the expectations of rising price increase the desire to own at any cost. People borrow to speculate on rising prices and so rates must go even higher, unless, of course, the FED is creating so much fiat money that rates are prevented from rising. The result is that people are rewarded for speculating in rising prices.
The overall price, OTOH effects the seller far more than the buyer. Before the seller lowers prices they offer incentives to the buyer or agent, which keeps the selling price constant but lowers the closing cost to the buyer and reduces the payout to the seller.
This period is over. Concession selling ended with persistent price appreciation. Why make concessions in a seller's market?
Sellers do this because it reduces the amount of cash the buyer needs at settlement which is always more important than selling price in a favorable interest rate environment.
This is weakly true in a buyer's market where prices are flat ot slightly down. That's not what we have now and what we haven't had for years.
I think if you look back you'll see that mortgage rates fell BEFORE the FED lowered rates and rose a little as the housing and refi market heated up even while the FED was lowering.
Mortgage rates are completely hostage to the federal funds rate, not the other way around. It's only FED largesse that enables all these mistaken views.
If people actually recognized that houses are always bought with cash (borrowed cash or cash from savings) then interest rates wouldn't have much to do with the price setting mechanism.
It doesn't matter in the slightest whether home buyers recognize it or not. What they end up doing way after the fact is determined by macro forces primarily engineered by FED.
Shouldn't a soft market cause a slowing of price?
It will. The Housing market lags by at least three months. It takes sixty days at the very least for a house sale to close. Contracts with real estate agents last six months. Reality sets in very slowly with sellers, it takes them quite a while to come around to the fact that the buyers have dried up and they need to lower their price.
No experience with rational expectations, I see. What if prices continue to rise even though there is a reduction of buyers? What if the psychology is such that people expect that their houses will be worth more later no matter what? Sellers don't back off. It is this psychology which has been silently enabled by FED largesse over the last several years. That's why a reduction of sales has no effect on home price inflation.
For a while the lower mortgage rates will prop up prices, but that doesn't work if buyers completely disappear.
This is a realtor's illusion. Lower rates never prop up prices. Lower rates can drive up prices. It depends on rational expectations. There is a significant difference between "prop" and "drive".
The latest data shows existing home sales have plunged, the increase in median you are looking at are homes that were put under contract sixty to ninety days previously.
So? There are fewer homes sold at appreciating prices. If we are recessing or slowing, how is that prices are appreciating? The revision made last month shows that fewer isn't much.
Meanwhile, sales of new U.S. homes plummeted in January,
You didn't read my previous post.
If the median prices continue to rise perhaps it is because the only buyers in the market are those that are still operating under your perceived wealth effect.
It doesn't matter in the slightest how you want to explain it away. What matters is the change to inflationary expectations. You can't convince a seller to sell for less because the recession is on. The psychology of expectation which has been laid in inadvertently by FED largesse, will not be broken by anything but tight money. We are no where near tight money.
If the median prices continue to rise perhaps it is because the only buyers in the market are those that are still operating under your perceived wealth effect.It is the same mechanism that makes discount stores and luxury goods sellers both do well in a recession.
Wealth effect causes discount stores to do well in a recession? |
